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p. 3 of 11 BACK | NEXT Executive Summary I. Recent Economic Developments A. Growth, Employment, Savings, and Investment B. Fiscal Developments C. Monetary Developments and Prices D. External Trade and Balance of Payments II. Short and Medium-Term Economic Prospects and Policy Issues Appendix

Country Economic Review - Cambodia : I. Recent Economic Developments

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Growth, Employment, Savings, and Investment

1. Aggregate Growth

1. A supply shock—severe seasonal flooding—struck Cambodia in mid-2000, weakening the economic recovery that began in 1999, following the turbulent years of 1997 and 1998. As a result, expansion of real gross domestic product (GDP) is expected to slow in 2000 from the 5.0 percent growth rate achieved in 1999 (Table 1). In addition to slowing economic growth, the flooding adversely affected the lives of one quarter of the population and caused over $100 million in damage to crops, livestock, and infrastructure. In contrast, and despite weakness in foreign direct investment (FDI), strong aggregate demand boosted the service and industry sectors, ensuring a real GDP growth rate higher than the 2.5 percent population growth rate, and thus some improvement from 1999’s real GDP per capita of $236 (Appendix, Table A1).

2. Because of the high rate of population growth, real GDP per capita improved by only about 2.0 percent per annum from $215 in 1994 to $236 in 1999 (in constant 1993 dollars), even with an average of 4.5 percent real GDP growth achieved for 1995-1999. This was relatively strong economic performance compared with the 3.0 percent average real GDP growth rate for Southeast Asia over 1995-1999. Yet, average real GDP per capita growth of about 2.0 percent for these years was insufficient to significantly reduce poverty. The percentage of the population living below the absolute poverty line in 1994 was estimated at about 39.0 percent, falling to 36.0 percent in 1997 and remaining at about 36.0 percent in 1999. An important reason for this outcome was that economic growth was not sustained at a sufficiently high level, reaching the Government’s target range of 6.0 to 7.0 percent only in 1995. Indeed, real GDP growth dropped below the population growth rate in 1998.

3. The unbalanced nature of economic growth contributed to its inability to significantly impact poverty. Industrial value added growth contributed most to rising real GDP in Cambodia, averaging 14.5 percent over 1995-1999 as compared with 11.2 percent for Viet Nam and 11.5 percent for Lao People’s Democratic Republic (PDR). Agriculture, averaging 3.9 percent growth of value added for 1995-1999, was comparable in performance to the 4.3 percent growth achieved by Viet Nam and 4.0 percent growth for the Lao PDR. However, in services value-added growth lagged noticeably at about 1.0 percent as compared with 6.0 percent for Viet Nam and 7.8 percent for the Lao PDR¹ In an economy at such an early stage of development, rapid industrial growth from a small base is to be expected. However, improved performance in agriculture and services would boost overall growth and increase its impact on poverty.

2. Sectoral Growth

a. Agriculture

4. After two years of anemic growth, the agriculture sector may experience a decline in 2000 because of the impact of flooding on crop production and despite expectations of moderate growth in fisheries. Flooding began as early as July 2000 and the Mekong River rose above emergency levels in September 2000, flooding key rice producing lands. Real value added for crops is projected to fall by about 1.0 percent, as compared with growth of 9.1 percent in 1999 and averaging about 8.0 percent over 1995-1999² Crops accounted for about 18.0 percent of 1999 GDP (Appendix, Table A2) so the projected impact of flooding was to cut the expected contribution of crops to real GDP growth by about 1.5 percentage points relative to its average contribution.

5. The inability to mitigate flood damage is a major contributing factor to the failure to achieve sustained growth of the crop subsector. Rice, Cambodia’s most important crop, accounting for about 60.0 percent of 1999 crop value added, is generally produced through low-input, low-output, rain-fed, single-crop subsistence farming. This results in high crop losses from

flooding, drought, and pest damage. On average during 1996-2000, 92.3 percent of the area cultivated to rice was harvested (Table 2). Heavy seasonal flooding in 1996 contributed to the loss of 15.0 percent of the cultivated area in the 1996 wet season; 10.0 percent to 20.0 percent was destroyed in the 2000 wet season. Changes in environmental factors (such as upstream deforestation and damming) may be increasing the frequency of severe seasonal floods.

6. In contrast to its impact on crops, extensive flooding tends to boost production in the large fisheries industry, so moderate growth in fisheries value added is expected in 2000. Fisheries value added accounted for 10.5 percent of GDP in 1999, making it the fourth largest subsector, behind crops, manufacturing, and wholesale and retail trade. Recorded value added for fisheries has been increasing rapidly over the last several years, growing by 45.0 percent since 1994 and by 16.0 percent in 1999 alone. Yet, Government statistics are believed to underreport the extent of activities in this subsector. Private estimates put the annual catch at 300,000 to 400,000 tons, as compared with official statistics of 100,000 tons or less³

7. Fisheries are a vital industry in Cambodia, providing the principal source of protein for the population and providing significant employment. Although individual fish catch rates have reportedly been falling, overall catches are growing because more people are fishing. Fishing activities are divided into large-scale operations involving exclusive concessions on fishing lots in the Tonle Sap and floodplains, licensed medium-scale activities, or small-scale family fishing. A rapid increase in medium- and small-scale fishing and mismanagement of fishing lots in recent years is leading to overexploitation of some fish species although others are still plentiful. However, in the longer term, increased use of flood control and loss of the fish-spawning habitat, particularly in the inundated forest area of the Tonle Sap, could significantly reduce fish productivity. The new Fishery Conservation, Management, and Development Law to address concerns over the health of the industry is being finalized in late 2000 in preparation for stakeholder consultations.

8. Value added in livestock and poultry, accounting for about 7.0 percent of 1999 GDP, is expected to post modest growth in 2000. Although some livestock were lost to the floods, some recovery is expected from the contraction in livestock production recorded in 1999. The recorded contraction in constant price value added may have involved larger than normal unrecorded livestock trade in regional markets due to large price increases in 1999. Livestock prices have been falling slightly this year, and the Government is taking steps to tighten control of unrecorded trade.

9. Forestry value added, which fell from 6.5 percent of GDP in 1997 to 4.0 percent in 1999, is expected to continue its decline in 2000 based on a drop in recorded exports in the first quarter of 2000 relative to the first quarter of 1999. This follows the 33.0 percent contraction in 1999, resulting from low world prices, past overexploitation, and a crackdown on illegal logging that began in 1999. Conditions that limit production and profitability, such as Government reforms and slow recovery in world prices, are expected to continue in the medium term.

10. A review of commercial concession management in 2000 indicated extensive violations of agreed sustainable forestry management practices. Concessionaires recently agreed to reductions of 50.0 to 75.0 percent of allowable production while these violations are addressed. Other key Government reforms include the 1999 increase in timber royalties from $14 per cubic meter to $54 per cubic meter, the creation of the Forest Crime Monitoring Unit, and the drafting of a new forestry law (expected to be passed by the legislature in 2000). Charging that the new royalty rate was set arbitrarily, is excessive, and does not reflect actual costs, concessionaires are asking the Government to consider setting rates based on site-specific criteria.

b. Industry

11. Industrial expansion, the cornerstone of economic performance for the past several years, is expected to accelerate in 2000 as rapid growth in textile exports to the United States (US) continues, leading to expectations of double-digit growth in manufacturing value added. In 1999, strong growth in textile production was partially offset by a sharp 63.0 percent drop in value added for manufactured wood, paper, and publishing products. This decline was attributed to the steep drop in timber available for local production arising from the crackdown on illegal logging, which led to rapid price increases in 1999 for house furnishings. However, the supply constraint for local wood appears to have eased, as evidenced by declining prices for house furnishings in late 2000. Manufacturing of food and beverages is expected to continue to expand in 2000 due to strong growth in tourism and domestic demand.

12. Through August 2000, US trade statistics show manufactured imports from Cambodia valued at $586.9 million, as compared with $385.1 million through August 1999, an increase of 52.4 percent.4 Thus, textile value added is expected to increase by about 35.0 percent in 2000, in spite of a January 1999 trade agreement with the US, which set import quotas for 12 categories of Cambodian textile products. Rapid garment export growth was possible because quotas were initially set above actual 1998 production levels, and by August 2000, quotas had increased by more than 20 percent on average in ten of the twelve categories. Moreover, in several of the categories (particularly sweaters, coats, and underwear), the quotas are not yet binding. Under the terms of the 1999 agreement (which lasts through 2001), quotas will increase automatically by 6.0 percent each year, with an additional increase of as much as 14.0 percent possible, based on evidence that Cambodian authorities are enforcing the labor laws⁵

13. Real industrial value added grew from 14.0 percent of GDP in 1995 to 19.6 percent in 1999, based predominantly on growth in manufacturing value added, primarily for textiles. Value added for mining, electricity, gas, and water, accounts for less than 1.0 percent of GDP. In 2000, offshore oil and gas exploration, begun in 1997, yielded prospects of a small gas deposit. If commercial development is feasible, this could provide a valuable source of energy for a country that depends on fuel imports for electricity, which is expensively produced and delivered only in urban areas. Construction, accounting for 4.2 percent of GDP in 1999, rebounded strongly in 1999 after two years of negative growth. Robust growth is expected to continue in 2000, despite flood-related disruptions.

c. Services

14. The service sector, hit hard by the disturbances of 1997 and 1998, recovered in 1999 as a return of consumer confidence fueled an expansion of domestic and foreign demand for services. Tourist arrivals increased by 41 percent (Table 3) and aggregate consumption grew by 3.9 percent in real terms in 1999 (Appendix, Table A3). This trend was expected to continue in 2000 with a 34.1 percent increase in tourist arrivals through September 2000, relative to the same period of 1999. In addition, strong growth in manufacturing and tourism was expected to increase formal sector incomes, stimulating domestic demand for services.

15. Tourism is a major industry, generating $82 million in foreign currency receipts in 1996 prior to the steep drop in tourist arrivals in 1997 and 1998. These receipts were estimated at $63 million in 1999 for about the same number of visitors, implying less expenditure per visitor. A second trend is the increasing importance of direct flights to Siem Reap from regional destinations. These began in 1998 from Bangkok, accounting for 5.6 percent of total arrivals by air that year, rising to 10.8 percent in 1999 and 22.1 percent through September 2000. Direct flights from Ho Chi Minh City began in 2000 and additional direct flights are planned from Singapore. These direct flights are expected to increase marketability, especially for multicountry package tours, which accounted for one third of all tourists in 1999.

16. The service sector, accounting for 36.0 percent of GDP in 1999, seemed poised to enter a sustained period of expansion after several years of stagnation. The dominant trade sector, at 10.9 percent of GDP in 1999, contracted for five consecutive years, by 11.0 percent in real terms from 1993 to 1998, before posting a 1.7 percent expansion in 1999. The poor performance over 1995-1999 was, in part, a result of the 1997/1998 political disturbances, but may also have involved an element of structural adjustment in the years after the involvement of the United Nations, which may have provided strong stimulation for service sector growth. In addition to the turnaround in trade in 1999, the hotel and restaurant subsector and the transport and communications subsector experienced dramatic recoveries.

3. Employment and Wages

17. Economic growth will need to be high, sustained, and balanced to absorb a rapidly growing labor force. The Cambodia Socioeconomic Survey 1999 (CSES 1999) estimates the total labor force at about 5.5 million or 66.0 percent of the population aged 10 years and above, an increase of more than 8.0 over the estimate of 5.1 million provided in the 1998 population census.6 Although the two measures may not be strictly comparable, the labor force is certainly growing more rapidly than the estimated population growth rate of 2.5 percent, perhaps as much or more than 200,000 per annum. Because of a postconflict baby boom, 26.3 percent of the population is aged 10 to 19 years, for which labor force participation rates can be expected to increase significantly over the next five years, while the cohort over 50 years of age is less than 10.0 percent of the population.

18. With this rapid increase in the labor force, evidence of extensive underemployment is not surprising, despite negligible open unemployment of 0.6 percent in 1999. About 656,000 people, or 11.8 percent of the labor force, were unemployed for 18 or more weeks during 1999. Furthermore, CSES 1999 suggests that low labor force participation rates for some age cohorts (e.g., about 86.0 percent for those aged 20 to 24 years) may indicate that a significant number of workers are discouraged rather than voluntarily out of the labor force. Finally, about 46.0 percent of employed persons were unpaid family laborers in 1999, as compared with just over 30.0 percent in 1997, as reported in CSES 1997⁷. Apparently, many additional workers are being absorbed into family businesses, which may often be a farm given that about 83.0 percent of the labor force is classified as rural with about 85.0 percent of those primarily employed in agriculture.

19. Nevertheless, the overall share of the labor force employed in agriculture fell from about 79.0 percent in 1997 to 76.5 percent in 1999 (Table 4). This is not surprising given the relatively rapid recent growth of industry and tourism. Yet, the large share of the population employed in agriculture indicates Cambodia’s early stage of development. Typical of such economies, agriculture employs 76.5 percent of the employed population but generates only about 40.0 percent of GDP. In contrast, industry generates about 20.0 percent of GDP while absorbing 6.4 percent of the employed population.

20. An analysis of income patterns indicates a population predominantly reliant on subsistence activities, especially outside of Phnom Penh. CSES 1999 reports an annual per capita income of $250, which compares closely with 1999 per capita GDP of $257. Yet the rural annual per capita income, $197, is less than one third that of Phnom Penh, $691, and less than two thirds that of other urban areas, $310. Moreover, self-employment generates as much as 60.0 percent of per capita income, while income from other sources such as transfers is about 20.0 percent and wage employment contributes about 20.0 percent.

21. Nevertheless, wage employment is slowly becoming more important both as a source of employment and income. About 15.0 percent of those employed in 1999 were classified as paid employees as compared with about 10.0 percent in 1997. The average annual earnings of wage employees was $520 in 1999, about twice the per capita income. On average, wage employees in Phnom Penh (about 53.0 percent of Phnom Penh employed) earned $939, with top Government officials, professionals, and machinists as top earners. In contrast, wage employees in rural areas (11.0 percent of rural employed) earned $353 per annum, with Government officials, clerks, market workers, and soldiers among the lowest paid.

22. Comparison of data collected at the village level in CSES 1997 and CSES 1999 indicate that daily wages for unskilled labor are low and falling in real terms, that Phnom Penh wages are significantly higher than rural wages, and that gender differences in wages are relatively low (Table 5). The 1999 daily wages for unskilled labor range from $2.31 for men plowing in the Phnom Penh area (down from $2.62 in 1997) to $0.95 for women planting in rural areas (down from $1.02 in 1997)⁸ Daily wages for unskilled men in 1999 were about 33.0 percent higher on average in Phnom Penh than in rural areas. Gender gaps in wages appear to be most pronounced in Phnom Penh for plowing and least pronounced in rural and other urban areas for planting.

4. Savings and Investment

23. To generate employment, Cambodia must achieve and maintain high rates of balanced growth; this requires sufficient levels of investment and savings. Cambodia’s average level of investment of 14.6 percent of GDP during 1995-1999 is nearly the lowest in Southeast Asia, for which the average level of gross domestic investment over the five years is about 24.0 percent (Table 6). Similarly, Cambodia’s five-year average gross national savings rate of 11.1 percent is the lowest in Southeast Asia, although about the same as those of the Lao PDR and Myanmar. Finally, Cambodia’s average savings-investment gap of minus 3.5 percent of GDP is somewhat higher than the average of about minus 2.6 percent for Southeast Asian countries, implying a higher level of dependence on foreign savings.

24. Although low by regional standards, Cambodia’s gross domestic investment rose from 11.7 percent of GDP in 1995 to 18.4 percent in 1999 (Table 7). Public investment fell from 5.9 percent in 1996 to 4.8 percent in 1997 as official assistance dropped with the political disruption, before recovering in 1998 and reaching 6.2 percent of GDP in 1999. Public savings, negative in three of the last five years, reached 1.8 percent of GDP in 1999. Official loan disbursements declined from a high of 2.4 percent of GDP in 1996 to 1.7 percent in 1999. Combining public savings and official loan disbursements leaves a public savings-investment gap that averages 3.7 percent of GDP over the five years.

25. Official transfers, averaging 8.4 percent of GDP over the five years, are more than sufficient to cover the public savings-investment gap. In fact, although official transfers are poorly and incompletely measured and not always channeled through the Government, if at least 50.0 percent of official transfers are devoted to capital spending, then public investment may be underestimated by as much as 0.5 percentage points of GDP on average⁹. However, official transfers fell from 11.3 percent of GDP in 1995 to 7.3 percent in 1999, increasing the importance of public savings and official loans as sources of public investment.

26. Private domestic investment rose from 6.3 percent of GDP in 1998 to 12.2 percent in 1999. In part, this resulted from the reduction in inventories in 1998 of about 1.0 percent of GDP and a subsequent increase in stocks in 1999 of about 2.5 percent. In addition, political stability is stimulating locally-financed investment, which is increasing as a percentage of investment projects approved by the Government for favorable tax treatment. FDI, in contrast, dropped slightly as a percentage of GDP from 4.3 percent in 1998 to 4.0 percent in 1999. Although FDI is crudely estimated, based in part, on investment approval statistics, a substantial decline since 1996 is apparent. FDI, reached a high of KR776 billion in 1996, then fell to KR458 billion in 1999, and may decline in 2000.

27. Statistics compiled by the Council for the Development of Cambodia for 836 approved projects from August 1994 through December 1999, indicate total commitments of $5.8 billion in fixed assets. Of this amount, 39.0 percent was in industry (led by wood processing, cement, and garments), 56.0 percent was in services (led by tourism and construction), and 5.0 percent was in agriculture. The local share of these investment commitments was about 27.0 percent. Malaysia was the primary foreign source of committed funds, with about 32.0 percent, about 8.0 percent came from other members of the Association of Southeast Asian Nations (ASEAN)¹⁰, 20.0 percent from the other Asia-Pacific countries, 8.0 percent from the Americas, and 6.0 from Europe. However, in 1999 alone, Cambodian investors committed $274 million of fixed assets in investment projects, up from $167 million in 1997 and $248 million in 1998. This accounted for about 58.0 percent of total investment projects approved in 1999.

28. Although local investment rose, overall investment commitments dropped to $470 million of fixed assets in 1999 from $855 million in 1998, with the biggest drops occurring in wood processing (down $175 million), tourism (down $100 million), and garments (down $50 million). Through the first nine months of 2000, investment commitments amounted to $213 million in fixed assets, predominantly in garment factories ($71.1 million) and tourism ($62.1 million). This compares with $235 million in fixed assets through the first nine months of 1999.

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